Yahoo Finance Datadog, Inc. (NASDAQ:DDOG) Q4 2023 Earnings Call Transcript
Datadog, Inc. (NASDAQ:DDOG) Q4 2023 Earnings Call Transcript February 13, 2024
Datadog, Inc. beats earnings expectations. Reported EPS is $0.55, expectations were $0.43. Datadog, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the Fourth Quarter 2023 Datadog Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to the Vice President of Investor Relations, Yuka Broderick.
Yuka Broderick: Thank you, Carmen. Good morning, and thank you for joining us to review Datadog's fourth quarter 2023 financial results, which we announced in our press release issued this morning. Joining me on the call today are Olivier Pomel, Datadog's Co-Founder and CEO, and David Obstler, Datadog's CFO. During this call, we will make forward-looking statements, including statements related to our future financial performance, our outlook for the first quarter and the fiscal year 2024 and related notes and assumptions, our gross margins and operating margins, our product capabilities, our ability to capitalize on market opportunities and usage optimization trends. The words anticipate, believe, continue, estimate, expect, intend, will and similar expressions are intended to identify forward-looking statements or similar indications of future expectations.
These statements reflect our views only as of today and are subject to a variety of risks and uncertainties that could cause actual results to differ materially. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our Form 10-Q for the quarter ended September 30, 2023. Additional information will be made available in our upcoming Form 10-K for the fiscal year ended December 31, 2023, and other filings with the SEC. This information is also available on the Investor Relations section of our website, along with a replay of this call. We will also discuss non-GAAP financial measures, which are reconciled to their most directly comparable GAAP financial measures in the tables in our earnings release, which is available at investors.datadoghq.com.
With that, I'd like to turn the call over to Olivier.
Olivier Pomel: Thanks, Yuka, and thank you all for joining us this morning. We had a good Q4 to end what has been a very productive year to 2023. Throughout the year, we kept innovating at a fast pace, going broader and deeper into the problems we solve for our customers. We also continue to add new customers and expand with existing ones, driving both usage growth and adoption of new products. But most of all, I'm very pleased that we mobilized as a company to help our customers get through a tougher economic environment. We help our customers make more efficient use of their cloud and observability, leaving them in a better position at the end of the year, from which they can focus again on growing their businesses and migrating to the cloud.
Now, let me start with a review of our Q4 financial performance. Revenue was $590 million, an increase of 26% year-over-year and above the high end of our guidance range. We ended with about 27,300 customers, up from about 23,200 last year. We ended the quarter with about 3,190 customers with an ARR of $100,000 or more, up from about 2,780 last year. These customers generated about 86% of our ARR. We had 396 customers with an ARR of $1 million or more, compared to the 317 we had at the end of last year. And we generated free cash flow of $201 million, with a free cash flow margin of 34%. Turning to platform adoption. Our platform strategy continues to resonate in the market. As of the end of Q4, 83% of customers were using two or more products, up from 81% a year ago.
47% of customers were using four or more products, up from 42% a year ago. 22% of our customers were using six or more products, up from 18% a year ago. And as a sign of continued penetration of our platform, 9% of our customers were using eight or more products, up from 6% a year ago. And our success with cross-product adoption isn't limited to core observability, as our newer products continue to gain traction. Note, for example, that the ARR for products outside of infrastructure monitoring, APM suite, and log management grew by more than 75% year-over-year. As a reminder, within the APM suite, we include core APM, Synthetics, RUM, and Continuous Profiler. During 2023, we continued to land and expand with larger customers. As of December 2023, 42% of the Fortune 500 are Datadog customers, up from 37% last year.
We think many of the largest enterprises are still very early in their journey to the cloud. The median Datadog ARR for Fortune 500 customers is still less than $0.5 million, which leaves a very large opportunity for us to grow with these customers. Now, let's discuss this quarter's business drivers. In Q4, we saw usage growth from existing customers that was similar to Q3. Our usage growth during the quarter played out roughly as expected, including a strong start in October and the slowdown we typically see at the end of December. We also note that the greater intensity of optimization we've seen over the past six quarters appears to have dissipated. For the last couple of quarters, we have discussed with you a cohort of customers who are optimizing.
In Q4, this cohort's usage grew at a faster pace than the broader customer base. We take this as a positive sign. To be clear, we see optimization activity with our customers every quarter. We expect them to continuously make sure they are using their cloud efficiently, and we'll keep helping them do that. And we do still see attention to cost in certain parts of our customer base, but overall, we see less headwinds than we did a few quarters ago. Meanwhile, we had a strong bookings quarter in Q4. Our go-to-market teams delivered our largest annualized bookings since Q1 of '22. And our enterprise team in particular executed on a record amount of annualized bookings in Q4. We are also seeing more customers enter into multiyear deals with us, which speaks to our deepening relationships with them, as well as customers planning for growth and for the longer term after a period of optimization and uncertainty.
As a reminder, our bookings don't translate immediately into revenue growth, but it is an indicator that we continue to serve our new and existing customers well, and they are growing with us over time. Finally, churn has remained low, with gross revenue retention stable in the mid-to-high 90s, highlighting the mission-critical nature of our platform for our customers. Moving on to R&D, we released over 400 new features and capabilities during 2023. Of course, that's too much for us to cover today, but let me speak to a few. In observability, we now have more than 700 integrations, allowing our customers to benefit from the latest AWS, Azure and GCP capabilities, as well as from the newly emerging AI stack. We continue to see increasing engagement there with the use of our NextGen AI integrations growing 75% sequentially in Q4.
In the Generative AI and LLM space, we continue to add capabilities to Bits AI, our natural language incident management copilot, and we are advancing LLM observability to help customers investigate how they can safely deploy and manage their models in production. Today, about 3% of our ARR comes from NextGen AI native customers, but we believe the opportunity is far larger in the future as customers of every industry and every size start deploying AI functionality in production. In the APM space, we launched Data Streams Monitoring to monitor queuing, streaming and event-driven pipelines, which is a technically challenging type of workloads APM products have historically struggled to cover. We also rolled out single-step APM onboarding, allowing a single engineer to enable APM across complex applications in minutes.
And with dynamic instrumentation, engineers can add logs, metrics, and traces to their applications on the fly without code changes or redeployment. In the digital experience area, we've added heat maps and scroll maps to our real user monitoring product to show developer and product owners what their users are actually seeing. And our customers can now create synthetic tests directly from Session Replay, for which, we have received very positive feedback. And in log management, we continue to expand our capabilities. Starting with Flex logs, customers can have cost-effective -- very cost-effective way to retain their logs at a very large scale. With error tracking for logs, customers can quickly cut down millions of error lines into a handful of actionable summaries.
And our log pipeline scanner allows customers to inspect log events in near real-time, building greater visibility into data quality and data governance. In Cloud Service Management, we made workflow automation generally available, enabling customers to easily automate and orchestrate processes across operations and security. And today, we are announcing the general availability of case management to provide engineers with a single view for investigations, ticketing, to-do items, tasks, and follow-ups across the Datadog platform. Moving on to Cloud Security. We kept executing against an ambitious roadmap and are pleased to know count over 6,000 customers using one or more Datadog Security products. This month, we launched software composition analysis to enable our customers to proactively detect and remediate vulnerabilities before the code gets to production.
We announced Cloud Infrastructure Entitlement Management to help customers prevent identity and access management security issues. We shipped cloud SIEM investigator, so customers can conduct deep security investigation using logs over long periods of time. We simplified security operations with our security inbox to allow our customers to correlate security issues into one single list to investigate and remediate. And we also expanded our data security capabilities. Sensitive Data Scanner now finding secrets and sensitive data in traces and run events, in addition to logs. In Software Delivery, we launched Intelligent Test Runner, which dramatically accelerates the testing process in CI/CD. And we shipped code quality and security gates to enforce best practices, catch security vulnerabilities, and prevent flaky tests.
And last, but not least, we delivered on a number of platform-wide initiatives. We launched our latest data center in Japan to help customers comply with local data privacy laws. We opened up CoScreen throughout our platform for collaboration, incident response, [fair] (ph) programming, and debugging. We extended Cloud Cost Management, which is now GA for AWS and Azure and will soon be for GCP, to offer a comprehensive view of costs across our customers' cloud footprint. And we announced our intent to achieve FedRAMP High and Impact Level 5 authorizations. So I'd like to thank our product and engineering teams for a very productive 2023 and I'm super excited with what we have planned for 2024. Let's move on to sales and marketing. First of all, I'd like to welcome Sara Varni to the team, as our new Chief Marketing Officer.
Sara brings more than 15 years of marketing experience centered around developers and enterprise software, and we really look forward to her leadership in this pivotal role. As I said earlier, we had a very strong close to 2023 with record levels of bookings and some very exciting new logos and expansions. So let's discuss some of our wins. First, we signed a three-year expansion and our first-ever nine-figure TCV deal with a major global fintech company. This expansion brings us into a major new business unit that we were not deployed in before. And this time, the customer focused on bringing end-to-end observability to their mobile applications and they focus, in particular, on being in front of any user-impacting issues through the use of our Real User Monitoring product.
With this renewal, this customer expects to use 15 Datadog products and will consolidate what used to be 10 separate tools, including the replacement of three commercial products across infrastructure monitoring, APM, and RUM. Next, we signed a seven-figure expansion with one of the world's largest restaurant chains. This customer is using AWS, Azure, GCP, and Oracle Cloud and they believe Datadog is the only platform that can deliver a consistent experience across all four clouds. With this expansion, the customer plans to deploy Datadog for Cloud Service Management use cases and will expand to a total of 10 Datadog products. Next, we signed an eight-figure multiyear expansion with a leading European financial services company. This customer is undergoing a large-scale migration to Azure and will expand its use of Datadog across on-prem, private, and public cloud.
Today, Datadog is used by 3,000 users every month in over 400 teams to monitor 13,000 hosts. With the migration, the Datadog platform usage will expand to more than 1,000 teams and 50,000 hosts. This customer plans to use 14 Datadog products and consolidate more than 10 legacy open source and cloud monitoring tools. Next, we signed a seven-figure land with one of the world's largest food and consumer goods company. This customer wants to be more proactive with risk mitigation and system resilience as they migrate to Azure. They also want to reduce the thousands of hours of engineering time they spend every year in incident triage. This customer brought in Datadog to be the observability foundation of their AIOps strategy, in particular using Watchdog and our incident management capabilities.
This new land includes 17 Datadog products and the customer expects to consolidate at least six commercial observability tools. Finally, we signed a six-figure land deal with one of the largest US utilities. This customer is re-architecting its customer-facing website and re-platforming its customer support experience. They identified Datadog as the only platform that could still easily integrate end-to-end with their existing sales, customer experience, and data workflows. This customer expects to start with six Datadog products and they will displace two commercial observability tools in the process. And that's it for this quarter's highlight. Congrats again to our go-to-market teams for their great work in 2023, an excellent close of the year, and ambitious plans for 2024.
Before I turn it over to David for a financial review, a few words on our longer-term outlook. During 2023, we continued to execute on our product innovation plans and we solved more problems and delivered more value to customers. As we enter 2024, it appears that the worst of cloud optimization may be behind us. We continue to believe digital transformation and cloud migration are long-term secular growth drivers of our business and critical motions for every company to deliver value and competitive advantage. We see AI adoption as an additional driver of investment and accelerator of technical innovation and cloud migration. And more than ever, we feel ideally positioned to achieve our goals and help customers of every size in every industry to transform, innovate, and drive value through technology adoption.
With that, I will turn it over to David.
David Obstler: Thanks, Olivier. Q4 revenue was $590 million, up 26% year-over-year and up 8% quarter-over-quarter. To dive into some of the drivers of this Q4 performance, first, regarding usage growth. Overall, we saw usage growth from existing customers in Q4 that was similar to what we saw in Q3. Last quarter, we mentioned that the larger and more intense optimizers had begun to show signs of stabilization. In Q4, we saw those trends continue and the large optimizers begin to grow again. While we may still be in a cost-conscious environment overall, we believe that the higher intensity of optimization has dissipated and clients are continuing to invest in new digital applications. For the first time in six quarters, our sequential ARR adds in Q4 were higher than in the year-ago quarter.
As we look at early data for Q1, January usage growth was solid. The rebound we're seeing from the slower end of December is better than what we experienced last January. We note as always that it's too early to know how the quarter will play out, and we would caution investors from extrapolating too much, but we're encouraged by the near-term trend. Regarding usage growth by customer size, we experienced our highest growth in our largest and smaller spending customers in this quarter. This includes a record increase in sequential ARR added from customers who spend $1 million or more annually with us, and an expansion of 1 million plus customers from 317 to 396 over 2023. In terms of new logos, our customer additions on a gross and net basis, as well as on a new dollar -- a new logo dollar basis were similar to that of Q3.
As before, our net adds including -- included slightly elevated churn in our very long tail of small customers, many of whom are self-service. Geographically, we experienced stronger year-over-year revenue growth in international markets in North America. Our international markets represented 31% of our revenue in Q4 2023, up from 28% in Q4 of last year. Finally, for our retention metrics. Our trailing twelve month net revenue retention was in the mid-110s in Q4. Our trailing 12 month gross revenue retention continues to be stable in the mid to high 90s. And our dollar churn is low and declined sequentially. Now, moving on to our financial results. Billings were $723 million, up 35% year-over-year. Billings duration increased year-over-year.
Remaining performance obligations, or RPO, was $1.84 billion, up 74% year-over-year. Current RPR growth was in the mid-40s percent year-over-year. We are continuing to see an increasing interest with our larger customers in multiyear commitments, which results in longer RPO duration in both total and current RPO. We welcome the opportunity to have these longer-term strategic partnerships with our clients. And we see that once customers are farther along in their optimizations, they feel comfortable committing over longer periods of time in the future. As we said before, we continue to believe revenue is a better indicator of our business trends than billings or RPO as those can fluctuate relative to revenue based on the timing of invoicing and the duration of customer contracts.
Now, let's review some of our key income statement results. Unless otherwise noted, all metrics are non-GAAP. We have provided a reconciliation of GAAP to non-GAAP financials in our earnings release. First, gross profit in the quarter was $492 million, representing a gross margin of 83.4%. This compares to a gross margin of 82.3% last quarter and 80.6% in the year-ago quarter. We continue to experience efficiencies in cloud costs reflected in our cost of goods sold as our engineering teams pursue cost savings and efficiency products -- projects. Our Q4 OpEx grew 10% year-over-year, a decline from 17% year-over-year growth last quarter. As we discussed last quarter, while making meaningful investments in 2023, we were more cautious than in previous years given the macro condition and focused more on efficiency and optimization.
We believe this will put us in a good position to accelerate investment in 2024 while maintaining margin discipline. Q4 operating income was $167 million, or a 28% operating margin, up from 24% last quarter and 18% in the year-ago quarter. As with last quarter, our margins ended up being higher than we expected in Q4 as we executed well on our internal optimization and cost management efforts. Turning to the balance sheet and cash flow statements. We ended the quarter with $2.6 billion of cash, cash equivalents and marketable securities. Cash flow from operations was $220 million in the quarter. And after taking into consideration capital expenditures and capitalized software, free cash flow was $201 million with a free cash flow margin of 34%.
Now for our outlook for the first quarter and the fiscal year 2024. Our guidance philosophy remains unchanged. As a reminder, we base our guidance on trends observed in recent months and apply conservatism on these growth trends. For the first quarter, we expect revenue to be in the range of $587 million to $591 million, which represents a 22% to 23% year-over-year growth. Non-GAAP operating income is expected to be in the range of $128 million to $132 million, which implies an operating margin of 22%. And non-GAAP net income per share is expected to be $0.33 to $0.35 per share based on approximately 35 -- 357 million of average diluted shares outstanding. For fiscal 2024, we expect revenues to be in the range of $2.555 billion to $2.575 billion, which represents 21% -- 20% to 21% year-over-year growth.
Non-GAAP operating income is expected to be in the range of $535 million to $555 million, which implies an operating margin of 21% to 22% and non-GAAP net income per share is expected to be in the range of $1.38 to $1.44 per share based on 361 million average shares diluted outstanding. Some additional notes on guidance. As it relates to our growth in OpEx and hiring, as I mentioned earlier, we took a more cautious attitude towards hiring during 2023. And our headcount ended fiscal 2023 at about 5,200 people, growing in the high single digits year-over-year. We remain excited by our numerous long-term growth opportunities. And as a result, our operating profit guidance reflects our intent to invest for future growth in 2024. We intend to accelerate hiring in R&D to execute on our long-term growth opportunities and in sales and marketing to reach customers worldwide.
Because of that, our operating profit guidance implies operating expense growth in the mid-20% range year-over-year, with operating expense year-over-year growth ramping throughout 2024 as we execute on our hiring plans. Meanwhile, we will continue to balance our investments in long-term growth with financial discipline as we have executed in the past. Now turning to other areas of the P&L. First, we expect net interest and other income for fiscal year 2024 to be approximately $100 million. Regarding taxes, while we expect to continue to be a modest cash payer in 2024, estimated to be $20 million to $25 million, we are establishing a non-GAAP tax rate of 21% in fiscal year 2024 and going forward. And this is reflected in our non-GAAP net income per share guidance.
We have recasted our fiscal 2022 and '23 non-GAAP net income to reflect this non-GAAP tax rate, and that is available in the tables in our earnings release as well as the financial supplemental. Finally, we expect capital expenditures and capitalized software together to be in the 3% to 4% of revenue range in fiscal year 2024. Now to summarize, we are pleased with our execution in 2023. We are well positioned to help our existing and prospective customers with their cloud migration and digital transformation journeys. And we plan to innovate further and expand the set of problems we solve for our customers in 2024 and beyond. I want to thank Datadogs worldwide for their efforts in 2023, and I'm excited about our plans in 2024. Finally, I'd like to invite you to join us for our Investor Day this Thursday in New York City.
Please go to the Datadog IR website for the live stream or contact the IR team at ir@datadoghq.com to attend in person. And with that, we'll open the call for questions. Operator, let's begin the Q&A.
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